Canadians Surpass Americans in Net Worth, But Will it Last?

They’ve been known to get pretty excited when a new, big-name discount retailer comes to town, but thanks to a booming housing sector, Canadians are more affluent than their American neighbors.

At least for the moment, that is.

Canada’s net worth was at a healthy 648% of gross domestic product in the final quarter of 2012, according to a report from independent economic research firm Capital Economics, which has gained something of a profile for its bearish views on Canada’s economy, and particularly its housing market.

By contrast, U.S. net worth was a more modest 550% in the same period.

The catch is that Canadians’ wealth advantage is built mostly on the big run-up in housing prices in recent years, and that’s a very shaky foundation, at least from Capital Economics’ point of view.

The firm has been forecasting for some time now an overall reduction of 25% in Canadian house prices to bring the ratio of house prices to per-capita income back to historic norms. If that happens, Canadians may have to give up their bragging rights in the North American wealth sweepstakes.

Capital Economics’ report said the key explanation for the gap seems to be the downturn in the U.S. housing market, which has coincided with a boom in Canada’s.

“Before that, net worth in both countries had been extremely close for more than a decade,” it said.

Net housing wealth in the U.S. has slumped from a peak of 180% of GDP in 2006 to only slightly more than 100% of GDP now.

“In contrast, Canadian households’ net housing wealth has continued to trend higher and now stands at more than 130% of GDP,” Capital Economics said.

“The US experience is a very important reminder that asset values can fluctuate, whereas the value of debt is largely fixed,” it said.

Based on the ratio of house prices-to-per-capita incomes, U.S. housing is currently about 20% undervalued relative to its long-run average, while Canadian housing appears to be more than 30% overvalued, Capital Economics said.

“The upshot is that while Canada has the bragging rights for now, things could be very different in a few more years.”

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Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com